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        Updated: April 06, 2024

        Cash ISA Vs. Stocks and Shares ISA

        Unsure whether to take out a cash or a stocks and shares ISA? Read up on the pros and cons of each in our guide so you can make an informed decision

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        If you have money to put aside and want to give it the best chance to grow in value over time, ISAs are among the best products currently available to help you reach your savings goals. But is it better to put your savings into stocks and shares or cash?

        This simple guide should help you decide whether you’d be better suited to investing in a cash or stocks and shares ISA (or a combination of both), as well as what alternatives might be available if neither option is quite the right fit.

        We will cover the following topics:

        What’s the difference between a cash ISA and a Stocks and Shares ISA?

        A cash ISA is essentially a normal savings account, but with the added benefit of a tax-free element that allows you to earn interest without having to pay tax on it. This is also true for stocks and shares ISAs, but instead of being held in cash, the money you put into stocks and shares or ‘investment’ ISA is invested in equities that are traded on the stock market.

        How much can you put in?

        You can put up to £20,000 a year into a stocks & shares or cash ISA tax free in the 2020-21 tax year, with interest added on automatically at the end of that period. This allowance is reviewed annually and may change again in the future.

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        Which is better?

        This will depend to a large extent on personal factors such as your appetite for risk, the amount of time you want to keep money aside in savings and how much you can afford to put away without immediate access to those funds should you need to raise cash quickly.

        While interest rates remain low, traditional savings accounts don’t offer much in the way of returns on cash, so if you have some to put aside it makes sense to make the most of the tax-free facilities on offer, either with cash or stocks & shares ISA.

        The summary below sets out their main pros and cons, but please don’t hesitate to make an enquiry if you’d prefer to talk your options through with an independent expert.

        Pros and cons of a cash ISA

        The biggest advantage of cash ISAs is that they are a very safe choice: you can’t lose the money you put in, and you should make some gains in the form of tax free interest. Most cash ISAs are also instant access, so whenever you need to dip into your savings, you can simply transfer it to another account.

        The main drawback of cash ISAs is that while they’re tax free, they cannot attract a significant amount of interest while rates are low, so for the time being at least, you should not expect to see a huge return on your investment at the end of the year. Plus with low interest rates the effect of inflation is a factor to consider.

        Pros and cons stocks and shares ISA

        The main attraction of stocks & shares ISAs is the potential for a greater return on your investment: if your stocks perform well, you’ll benefit from much higher rates of interest on your savings.

        However, this means you could lose your initial investment if the equities don’t perform well, as is true for any product that relies on fluctuations of the stock market. Shares ISAs can also be more time consuming if you want to manage your own portfolio, and providers are more likely to charge fees.

        Can I have a cash ISA and stocks & shares ISA at the same time?

        Yes you can, and this may be a good strategy if you are in a position to spread your savings across more than one account and are looking to reap the possible rewards of both options.

        Don’t forget however, the total amount you can invest in all your ISAs tax free in one year cannot exceed £20,000 – and this rule applies even if one is a cash ISA and the other is a shares ISA.

        What are the rules around transferring a cash ISA to a stocks and shares ISA?

        If you already have a cash ISA and decide that you’d like to transfer all or part of it to a stocks and shares ISA, you are permitted to do this.

        However, if you have paid into the ISA you’re transferring money from during the current tax year, you will have to transfer the whole balance. You can choose how much you want to transfer from an ISA you’ve contributed to in previous years.

        Cash lifetime ISA vs stocks and shares lifetime ISA

        Lifetime ISAs or LISAs are another type of long-term savings account you may have heard of, and these can also be based either on cash or on investments. The pros and cons of each are subject to the same rules as those described above: more potential reward equals more risk.

        On top of the gains you could make in interest and/or returns on investments, you’ll benefit from a 25% government bonus on savings up to £4,000 a year. The bonus is applied to both cash-based and stocks and shares lifetime ISAs.

        However, to be eligible to open a LISA of any kind, you’ll need to be aged between 18 and 39, saving either for your first home or for retirement, and you won’t have access to your money until you’re in a position to buy that first property, or until you hit retirement age.

        Can I have a Lifetime ISA and any other type of ISA at the same time?

        You can have a Lifetime ISA or any kind at the same time as standard cash or investment ISA, but you will still be subject to the £4,000 annual cap for the government bonus on your LISA, and anything you save in your LISA will also count towards the £20,000 tax-free ISA limit.

        What are the alternatives?

        Depending on circumstances such as your age, your reason for saving and other factors, there may be several options available if you want to explore other ways of saving. These include but are not limited to:

        • Lifetime ISAs or “LISAs”: designed to help you save for a first home or retirement
        • Junior ISAs can be set up by a parent or guardian for a child under 16
        • Traditional savings accounts (interest is taxed above £1,000)
        • Holding savings in an interest-paying current account
        • Investing in property, such as purchasing a buy-to-let property
        • Increasing payments into a pension.
        • Purchasing premium bonds

        Get advice from an expert on which ISA is best for you

        If you’re still not sure which ISA is right for you or even if you want to look into a different investment option altogether, the experts we work with are ideally placed to help you find the best solution for your savings.

        Call us on 0808 189 0463 or make an enquiry today and we’ll be in touch soon to discuss your requirements. We won’t charge you for the consultation and there’s absolutely no obligation on your part.

        Ask A Quick Question

        We can help! We know everyone's circumstances are different, that's why we work with brokers who are experts in ISAs. Ask us a question and we'll get the best expert to help.

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        Richard Angliss

        Richard Angliss

        Finance Expert

        About the author

        Richard Angliss has made a career in financial services which stretches over 40 years.

        His early career was spent learning about the various financial products and applying them to prudent advice, working for one of the largest life assurance and investment firms. After that he joined the financial services arm of a very well-known firm providing independent advice to their 8 million customers.

        For the last 20 years he has been involved in building software solutions that help Advisers and clients work together to achieve good financial outcomes and helping to set up three independent advisory firms. He also has written many articles for financial services publications and provided commentary for newspaper journalists.

        At an early stage in his career he realised the great satisfaction that comes with being able to help people achieve their goals and protect their families. “Regulation of financial services has hugely impacted on ensuring people get appropriate advice. The issue these days is access to that advice and just as importantly regular reviews to make sure that everything stays on track”.

        With the growing development of online resources such as Online Money Advisor he sees a great future for people to access advice to make their pension and investment work harder for them.  Plus, of course, to ensure they have insurance products in place that will be required when unforeseen events happen.

        He knows getting that balance right is crucial to prudent financial planning and the wellbeing of individuals and their families.

        FCA Disclaimer

        *Based on our research, the content contained in this article is accurate as of the most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The information on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us as well as any of our own are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs.

        Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.